Module 2 - GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

(GAAP) AND DOUBLE ENTRY

MEANING OF GAAP

Generally Accepted Accounting Principles (GAAP) are set of rules, standards and procedures that
certain businesses and organizations must follow as promulgated by the Institute of Chartered
Accountants of India and under the Indian Companies Act.

Generally Accepted Accounting Principles (GAAP) can be divided into two. They are Accounting
Concepts and Accounting Conventions.
ACCOUNTING CONCEPTS

Accounting Concepts define the assumptions on the basis of which financial statements of a business
entity are prepared.

Separate Entity Concept:

In Accounting, the business is considered as a separate entity from the proprietor or owner. So
Proprietor or owner’s personal transaction does not come into business. Financial transactions relating
to business only will be recorded in the Books of Accounts and that helps to give a proper financial
picture of the business. It is also called as Business Entity Concept.

Money Measurement Concept:

Events or transactions which cannot be expressed in terms of money cannot find place in the Books of
Accounts though they may be very useful for the business. All the financial transactions expressed in
monetary units can only take place in the Books of Accounts because Money is the common
denominator for quantifying the effects of transactions.

Going Concern Concept:

The business entity is assumed to be a going concern i.e. the business will continue for an indefinite
amount of time. There is neither intention nor the necessity to liquidate the particular business venture
in the foreseeable future. The importance of this assumption is in case of liquidating the business in the
near future, it would have to restate its assets and liabilities in accordance with the actual amount that
could be realized or payable. It also helps to reflect the true financial position of the company.

Dual aspect Concept:

Every transaction must have a double entry called debit and credit while recording it. The receiving
account is debited and the giving account is credited with the same amount. Thus every Debit must have
an equal and corresponding Credit and vice versa. It is also called as Double entry system of Accounting.

Realisation Concept:

Realisation is the point in which revenue has been generated. Transaction cannot be recorded only when
the cash is received. It should be recorded only when the revenue is earned i.e., when the goods have
been transferred to the buyer or services have been rendered. And while recording revenue, it is not
necessary that cash have to be received. It can also be in credit.

Cost Concept:

According to this concept, the assets are recorded at their respective prices at the time the asset was
purchased or acquired. The value of the asset cannot be increased according to the improvements in
market value or inflation but can systematically reduce its values by charging depreciation.

Accounting period Concept:

Accounting period is the span of time at the end of which financial statements are prepared to throw
light on the results of operation during the relevant period and the financial position at the end of the
relevant period. All the Accounting transaction should be divided into equal time period. It can be either
a calendar or fiscal year but also a week, month or quarter etc.
Matching Concept:

According to this concept, Revenues earned during an Accounting period is compared with the same
expenditure incurred during the same period for earning that revenue. It can be done by identifying all
the expenses incurred during the Accounting period, measure the same and match expenses against
the revenue earned in the same period.
ACCOUNTING CONVENTIONS

Convention of Conservatism:

According to this convention, Profits should not be anticipated but provide for all possible losses.
Revenues and Gains are recognized only when realized in the form of cash or when the money is realized.
Provisions must be made for all known liabilities, expenses and actual and probable losses. This policy
can be followed for pre- caution and playing safe. It helps to safeguard against possible losses in the
world of uncertainty. It is also called as Prudence principle.

Convention of Consistency:

According to this convention, accounting practices should remain unchanged from one Accounting
period to another. It must be consistent. Once a firm has decided on certain Accounting policies and
methods and has used these for some time, it should continue to follow the same methods or
procedures for all subsequent similar events and transactions unless it has a sound reason to do
otherwise.

Convention of Full Disclosure:

Disclosure is the process of making information or facts known to the public. Financial Statements
should be honestly prepared and sufficiently disclose information which is of material interest to
proprietors, present and potential creditors and investors.

Convention of Materiality:

This convention states that business should include only the important and relevant facts in the
Financial Statements. Material facts refers to any information whether excluded or misreported in the
Financial Statements and that could influence the users of such Financial Statements. This convention
makes the Financial Statements meaningful.
METHODS OF ACCOUNTING

Basically all the methods of Accounting are classified under two heads:

1. Single Entry System

2. Double Entry System

Single Entry System

Kohler defines single entry system as,” A system of books keeping in which as a rule only records of
cash and of personal accounts are maintained, it is always incomplete double entry varying with the
circumstances”.

Usually under this system, the cash book and personal account of debtors and creditors are maintained;
real and nominal accounts are not maintained.

For example, cash paid to acquire a fixed asset, where one aspect is recorded.

Double Entry System

The procedure of recording both the receiving and giving aspects related to business transactions is
called double entry system.

It denotes that every business has two fold effects. Every business transaction has effect at least on
two accounts namely the debit account and credit account. This system is popularized as scientific and
comprehensive accounting procedure.

It refers to an Accounting concept whereby,

Assets = Liabilities + Owners’ Equity

Importance of Double Entry System

• Business firms get accurate, comprehensive and reliable record of all its business transactions
• Comprehensive information relating to assets, liabilities, profits and loss of business will be
made available.
• It ensures arithmetical accuracy of books of accounts.
• Effective comparison between two years of various items such as purchases, sales, incomes,
expenses etc.
• Various financial statements like profit and loss account, balance sheet, statement of fund flow
and cash flow can be prepared
• The collection and payment of debtors and creditors will be made effectively by ascertaining their
balance correctly.
• Under this system, errors or frauds can be easily detected and rectified.
• Trial balance preparation is made easy by transferring the amount from the closing balance of
ledger accounts, which proves the arithmetical accuracy of the accounts.
• The tax authorities depend on the double entry system for proper assessment of tax.
• The double entry book keeping is a procedure, perfect in all respects and offers all possible
advantage in keeping books of accounts.
Differences between Single Entry System and Double Entry System
Module 2 - Short Answer Questions
1. What is double entry system?
2. What is going concern concept?

3. What do you mean by convention of Full disclosure?

4. What is meant by matching concept?

5. What is meant by convention of consistency?

Module 2 - Long Answer Questions

1. What are the basic accounting concepts?
2. Briefly explain the various accounting conventions.
3. State the differences between single entry and double entry
Module 3 - JOURNAL
INTRODUCTION

Meaning

Journal is a book of primary entry or a book or original entry in which transactions are first recorded in
a chronological order, i,e.,, in the order or sequence they are entered. Transactions are recorded in the
Journal book from the accounting voucher that are prepared on the basis of source documents, i.e.,
cash memo, invoices, purchase bills, etc.

All financial transactions can be recorded in a simple Journal Alternatively, in may maintain separate
Journal to record particular type of transaction, e.g., credit purchases may be recorded in Purchases
Return Journal, and so on. These separate Journals called Special Journals or Special Purpose
Books and often called as Subsidiary Books.

DEFINITIONS

“The basic books of accounting is called Journal. Precisely it is the books or prime entry which means-
--Day Book. Trader records his total daily transactions in it. The process or recording the transactions
into Journal is called Journalising”.
FORMAT OF A JOURNAL

Format of a Journal: Journal is divided into five columns.

These are: Date, Particulars, Ledger Folio (L.F.) Debit Amount and Credit Amount. The format of a
Journal is a follows:

(L.F. stands for Ledger Folio)

1. Date: In this column, the transaction date is written.

2. Particulars: According to Dual Aspect Concept of accounting, both the aspects of a transaction are
recorded, i,e., at least two accounts are affected by a transaction. The name of account to be debited
is written first followed by the word ‘Dr.” written close to the Right-hand margin line, while the name of
the account to be credited is written in the next line preceded by the word “To”, a little to the right.

3. Narration: A brief description of the transaction is also written after the entry.

4. Ledger Folio (L.F.): In this column the number of ledger page is written to which the debit and credit
aspect of the transaction is posted. For example, the proprietor invests further capital of Rs 5,00,000
and Capital Account is maintained at ledger page 53,against the entry” To Capital A/c’ in the L.F. .Column
53 is written which shows that credit aspect of the transaction is posted to ledger page’53.

5. Debit Amount: In this column, the amount debited is written.

6. Credit Amount;In this column, the amount credited is written.

Steps in Journalising

Steps involved in Journalising are:

Step 1: Determine the accounts that are affected by a transaction.

Step 2: Determine the nature of the accounts affected.

Step 3: Determine the accounts to be debited and credited by applying the rules of debit and credit.

Let us, at this point, recapitulate the rules of debit and credit.
Step 4: Determine the amount by which the accounts are to be debited and credited.

Step 5. Record the date and month or the transaction in the ‘Data” column and the year at the top.

Step 6: Record in the “Particulars” column the account to be debited. Along with the name of the
account, abbreviation Dr.” is written in the same line against the name of the account. Write the amount
to be debited in the ‘Debit Amount” column.

Step 7. Record in the ‘Particulars” column the account to be credited. Name of the account to be
credited is written in the next line preceded by the word “To”. The word “To’ is written towards the right
after leaving a few spaces. Write the amount to be credited in the ‘Credit Amount’ column.

Step 8. Record brief description of the transaction starting from the next line in the ‘Particulars”
column. This brief description of the transaction is called narration.

Step 9. Draw a line across the ‘Particulars’ column to separate on Journal entry from the other.
PROBLEMS

1.The following are the transactions of Mr. Kumar during the month of July 2011 on the following
dates:

01. Capital introduced by Mr. Kumar Rs.10,000.

02. Furniture purchased for cash Rs.500.

07. Purchased goods for cash Rs.3000

11. Sold goods to Raman for cash Rs.1500

15.Paid electricity charges Rs.150

Journalise the above transactions in the books of Mr.Kumar.

Solution:

Journal Entries in the books of Mr. Kumar

2. Mr.Kiran gives the following information. You are required to journalise them in his books.

March 2000

1 Commenced business with a cash 2,60,000

3 Opened an account with a bank and deposited.25,000

8 Purchased goods for cash 50,000

10 Purchased furniture for cash 1,500

13 Sold goods for cash 12,000

15 Sold goods to Kumar 8,000

Solution:

In the books of Mr. Kiran

3. Mr. Narayanan, running a business, gives the following transactions during the month of February
2011 on the following dates:

10 Cash invested into business Rs1,45,000

18 Sold goods to Ganesh Rs. 14000

20 Purchased goods from Daniel Rs.33,000

23 Ganesh settled his account Rs. 13,500

26 Paid to Daniel Rs.32,000 and settled the account

Journalise the above transactions.

Solution:

In the books of Mr. Narayanan

4. Yogesh provides the following particulars on 1st June 2006: Cash in hand Rs.20,000; Cash at bank
Rs.15,050;Stock Rs.45,000; Machinery Rs.30000; Debtors Nalan Rs.10,530,Kovalan
Rs.5,500;Creditors :BalaRs. 12,500,Murugan Rs.45,200 and Loan from Ashish Rs.5,780.Pass Journal
entry and calculate the capital.

Solution:

In the books of Yogesh

Module 3 - Short Answer Questions
1. What is Journal?

2. Give the Proforma of Journal.

3. State the Golden rules of Accounting.

Module 3 - Long Answer Questions

PRACTICE PROBLEMS

1. Prepare Journal entry for the following transaction:

2. Jeya is a sole proprietor having a provision store. Following are the transactions during the month
of January, 2018. Journalise them.
Module 4 - LEDGER
Module 4 - Lesson

INTRODUCTION

Meaning of Ledger

Ledger is also an important book of Account. Ledger is a book in which personal, real and nominal
accounts are maintained in a summarized and classified form. In other words, it is a book containing
accounts to which debits and credits are posted from books of original entry. Ledger is a combination
of all accounts and is a permanent record. Ledger is also known as the principal book of accounts as
well as book of final entry. The purpose of preparing the ledger is to

• Summarize the transactions for each account at one place.

• Determine the debit or credit balance of each account.
• Help in reconciling balances with third parties.
• Know the assets and liabilities.
UTILITY OF LEDGER

1. Provides Complete Information of a particular Account:

Complete information relating to a particular account is available at one place in the ledger.

2. Information of Income and Expenses:

In ledger, a separate account is maintained for each income and expense. The amount of total income
and total expenses is known from the ledger account.

3. Preparation of Trial Balance:

Ledger helps in preparing Trial Balance which ensures arithmetical accuracy of the transactions
recorded in books of account.

4. Helpful in preparing Final Accounts:

After preparing Trial Balance, Final Accounts are prepared to know the profitability and financial position
of the business.

Difference between Journal and Ledger:

FORMAT OF LEDGER ACCOUNT

Format of Ledger Account

The format of Ledger account has been explained in an earlier chapter. For convenience, it is being
repeated here.

1. Journalise the following transactions and post them into the Ledger:

2019

April 1 Ramesh started business with cash 1,00,000

April 2 Paid into bank 70,000

April 3 Bought goods for cash 5,000

April 4 Drew cash from bank for office 1,000

April 13 Sold to krishna goods on credit 1,500

April 20 Bought goods from shyam on credit 2,250

April 24 Received from Krishna 1,500

April 28 Paid cash to shyam 2,150

Discounted allowed by him 100

April 30 Cash sales for the month 8,000

April 30 Paid Rent 500

April 30 Paid salary to Ram 3,000

Solution:

In the Books of Ramesh

 Date Particulars L.F Debit Credit

Rs. RS.
2019

April 1 Cash A/c ...Dr. 1 1,00,000

To Capital A/c 4 1,00,000

(Being the amount invested by Ramesh

in the business as capital)
Bank A/c … Dr.

To Cash A/c 5 70,000

April 2 (Being the amount paid into the bank) 1 70,000

Purchases A/c … Dr.

5,000
To Cash A/c
7 5,000
(Being the goods purchased for cash)
April 3 1

Cash A/c ...Dr.

April 4 To Bank A/c 1,000

(Being the cash withdrawn from the 1 1,000

bank)
5

Krishna

To sales A/c

April 13 (Being the goods sold to krishna on 1,500

credit)
9 1,500

Purchases A/c … Dr. 8

To Shyam

(Being the goods bought from Shyam

April 20 on credit) 2,250

7 2,250
Cash A/c ...Dr.
 To Krishna 10

(Being the cash received from krishna)

Shyam ...Dr.
April 24 1 1,500
To Cash A/c
9 1,500
To Discount Received A/c (Note 1)

(Being the discount allowed by Shyam

on payment being made to him)
Cash A/c ...Dr.
10 2,250
To Sales A/c
April 28 1 2,150
(Being the goods sold for cash)
12 100

1 8,000

April 30 Rent A/c …Dr. 8 8,000

Salaries A/c …Dr.

To Cash A/c

(Being the account paid for rent and

salary)

Total 15 500

April 30 14 3,000

1 3,500

1,95,000 1,95,000
LEDGER
Module 4 - Short Answer Questions
1. Write short notes on Ledger.

2. State the utilities of Ledger.

3. What are the difference between Journal and Ledger?

Module 4 - Long Answer Questions

Journalize the following transactions and post them into Ledger accounts as on 31.00.2008 in the
books of Karthik